A Theory of Digital Firm-Designed Markets: Defying Knowledge Constraints with Crowds and Marketplaces

Abstract

In this paper we investigate the ways in which new forms of organization enabled by digital technologies such as crowdsourcing and digital marketplaces are allowing firms to circumvent and defy traditional knowledge constraints. This is part of the broader question of when and why these forms of organization are more efficient relative to alternatives, given that some firms utilize crowdsourcing, marketplaces, as well as traditional forms of organization simultaneously. We observe that an important cluster of these new organizational forms are able to circumvent knowledge constraints because they combine elements of market and hierarchical organization in firm-designed hybrid arrangements. We further categorize these firm-designed markets into one-sided market arrangements (crowds) and two-sided market arrangements (marketplaces). To explain their efficiency relative to hierarchies and relative to each other, we take a knowledge-based perspective and review ways in which firm-designed markets reduce or remove both first-order (known unknown) and second-order (unknown unknown) knowledge constraints compared to hierarchies. Our argument hinges on the notion that firm-designed markets provide semi-directed and undirected search and generativity mechanisms that allow firms to go beyond what is possible with centrally directed search.

Keywords: two-sided markets, information technology, open innovation, technology and innovation management, knowledge-based view, ecosystems, market-hierarchy hybrids, uncertainty, crowdsourcing, platforms

JEL Classification: L1, L10, L17, L19, L20, L21, L22, L23, L25, L26, L29, M10, M19